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Executives

Julie Loftus Trudell – Investor Relations

James G. Carlson – Chairman of the Board, President, Chief Executive Officer

James W. Truess – Chief Financial Officer, Executive Vice President

Richard C. Zoretic – Chief Operating Officer, Executive Vice President

John E. Littel – Executive Vice President - External Affairs

Analysts

Thomas Carroll – Stifel Nicolaus & Company, Inc.

Greg Nersessian – Credit Suisse

Joshua Raskin – Barclays Capital

Doug Simpson – Merrill Lynch

Scott Fidel – Deutsche Bank

Carl McDonald – Oppenheimer

Peter Costa – Ftn Midwest Securities Corp.

Brian Wright – Banc of America Securities

Matt Perry – Wachovia Capital Markets, Llc.

John Rex – J.P. Morgan

AMERIGROUP Corporation (AGP) Q3 2008 Earnings Call October 23, 2008 8:30 AM ET

Operator

Welcome to AMERIGROUP Corporation’s Third Quarter Earnings Conference Call. During the presentation all participants will be in a listen-only mode. After management’s presentation, you’ll be invited to participate in a question-and-answer session. (Operator Instructions). As a reminder, this conference call is being recorded today, Thursday, October 23rd 2008.

I will now turn the conference call over to Julie Loftus Trudell, Senior Vice President of Investor Relations of AMERIGROUP. Please go ahead.

Julie Loftus Trudell

Good morning and thank you for joining AMERIGROUP’s third quarter earnings conference call and webcast. I’m Julie Loftus Trudell, Senior Vice President, Investor Relations, and with me this morning are AMERIGROUP’s Chairman and CEO, Jim Carlson; Chief Operating Officer, Dick Zoretic; Executive Vice President, Government Relations, John Littel and Chief Financial Officer, Jim Truess.

Following our prepared remarks, we'll be pleased to respond to your questions. The press release announcing our third quarter earnings was distributed yesterday after the close of the market. A replay of this call will be available shortly after the conclusion of the call through Thursday, October 30th. The numbers to access this replay are in the press release. The conference call will also be available through the Investor’s page of the company’s website approximately two hours following the conclusion of this live broadcast for 30 days.

The press release and this conference call are intended to be disclosures through methods reasonably designed to provide broad, non-exclusionary distribution to the public in compliance with Regulation Fair Disclosure. The Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this call and some of the statements we will mention today are forward-looking including, among others, our estimates for 2008 and 2009. We can give no assurance they will prove to be accurate because they are of a prospective nature.

The actual results that we produce in the future could differ materially than those we discuss today. I encourage you to read our annual report on Form 10-K for the year ended December 31st, 2007 that we filed with the SEC and subsequent quarterly reports on our Form 10-Q and current reports on our Form 8-K that we filed with or furnished to the SEC for certain known risk factors that could cause our actual results to differ materially from the current estimates.

We will be discussing financial information that includes non-GAAP financial measures in our call today. Certain financial figures in today's comments are non-GAAP numbers, which exclude the effects of the one-time charge of the litigation settlement previously disclosed in the second quarter earnings release. Please refer to our 2008 third quarter earnings press release issued yesterday, and our current report on Form 8-K filed with the SEC yesterday for the most current directly comparable GAAP financial measures and a reconciliation to the non-GAAP financial measures discussed today.

At this point, I'd like to turn the call over to Jim Carlson, our Chairman and CEO. Jim?

James G. Carlson

Well thanks, Julie. Good morning and thank you for joining our call today. AMERIGROUP produced better than expected results in our health plan operations in the third quarter. We remain acutely focused on the operations of our business at a time when the delivery of predictable and cost-effective services for our state partners and members is even more critical than ever before.

That focus continues to pay off. We are seeing improving results in Tennessee along with a smooth implementation of the new managed long term care services program in New Mexico. Along with our operational progress, we believe our strong balance sheet, careful investment strategy and solid cashflow position us well for the remainder of 2008 as well as the years ahead.

We've prepared our comments today to focus on a few issues we think are important to you. I'll provide a brief overview of the third quarter and then ask Dick Zoretic to discuss our improvements in Tennessee and provide an update on our launch into New Mexico. John Littel will follow with his thoughts on the current economic environment and its impact on state budgets. And finally, Jim Truess will cover quarterly financial details, provide commentary on our balance sheet and investment portfolio, as well as our outlook for the remainder of 2008 and full year 2009.

Let me start then with specific third quarter highlights. For the quarter, we reported earnings per diluted share of $0.74 with quarterly premium revenue of $1.1 billion, reflecting a 9.1% increase over the prior year. Solid performance across our health plans yielded favorable results for the quarter. Correspondingly, our health benefits ratio was 80.1%. The SG&A ratio was 14.4% of total revenues.

Our total membership was over 1.7 million, which is a year-over-year increase of 186,000 members, or 12% when compared to the end of the third quarter of last year. Sequential membership increased 28,000 before accounting for our planned and orderly exit from the District of Columbia in the second quarter of 2008. The net impact resulted in a sequential decline of 6,000 members, or less than 1% of total enrollment.

During the quarter, we repaid $52 million of our term loan and purchased approximately $4 million of our stock pursuant to our share repurchase program. As of September 30th, we had $283 million of unregulated cash with a debt-to-capital ratio of 27.6%. Our cashflow from operations during the quarter, excluding the impact of the recent litigation settlement, was $74 million.

Finally, as you saw in our press release, we have increased the midpoint of our guidance for 2008 by $0.25 per diluted share and introduced our 2009 full year guidance of $2.50 to $2.65 per diluted share.

Jim Truess will get into more detail on those numbers, but right now I'd like to ask Dick to talk about progress in Tennessee and New Mexico. Dick?

Richard C. Zoretic

Thanks, Jim and good morning everybody. In our first quarter earnings call, we discussed the higher than expected medical costs we were experiencing in Tennessee due primarily to private duty nursing and home healthcare expenses running higher than we assumed in our original underwriting projections. As a reminder, this resulted from the dramatic and unanticipated acceleration in cost for home healthcare and private duty nursing benefits to the TenCare Program prior to AMERIGROUP entering this market. As we've discussed in the past, these costs were not fully reflected in the state's original premium rate development. Subsequently in our second quarter call, we recorded the premium increases that we received relating to both retrospective and prospective time periods. These included a one-time payment of approximately $47 million and a two-part rate increase of approximately 11.7% to address both the premium deficiency as well as ongoing medical trend.

At that time, we also announced that CMS had approved a benefit change establishing new limits on covered benefits for home healthcare and private duty nursing services. These new benefits, which were implemented in mid-September, imposed weekly limits on skilled nursing and home healthcare hours and most significantly, eliminated private duty nursing benefits for most adults in favor of clinically appropriate but less costly home healthcare benefits.

This morning I am pleased to report on the progress we have made in implementing the plan that I detailed for you on Investor Day. The performance in our Tennessee market has improved significantly from the first half of the year with the main drivers being the following.

First, Tennessee's health benefits ratio declined in the quarter, reflecting both a July rate increase as well as significant improvement in our medical expense run rate, driven by the successful implementation of a number of medical cost reduction initiatives by our local leadership. These initiatives include the implementation of the state's least costly alternative policy relating to private duty nursing benefits along with a number of other provider recontracting and utilization management initiatives targeting other categories of medical spending.

Second, the new CMS-approved benefits became effective in the third week of September and since then, approximately 70% of our Tennessee members impacted by the new home healthcare benefits have been transitioned to new care plans. As a reminder, these individual care plans were developed in close collaboration with attending clinicians and family members. We expect the remainder of the effective members to be transitioned during the fourth quarter.

While the new benefit limits did not have a significant impact on costs in the third quarter due to the timing of their implementation, we do expect there to be a greater positive impact on our Tennessee HPR in the fourth quarter as well as in future periods.

Third, we experienced favorable reserve development in the quarter, reflecting the emergence of more favorable cost trends, primarily in the first and second quarters of this year. While we have not completed our quarterly statutory filing yet, you should expect that the medical loss ratio reported on the NAIC blank for Tennessee to be in the low 80s, driven by a combination of higher premium rates, a lower medical expense run rate inside the quarter, and favorable reserve development in prior quarters.

While there is still much work to be done to improve performance levels to company norms, we are pleased with our progress in the third quarter and look forward to continuing our work with our partners in Tennessee to serve the state and its most vulnerable citizens.

Let me add one additional point to my comments on Tennessee. One of the most important areas of focus for the state is the planned integration of long-term care services into the managed care program next summer. We have been working closely with TenCare and others on the program design and are bringing our significant experience in other markets to bear in these discussions. We will update you with more specific information on future calls as plans for this program solidify.

Moving onto New Mexico, we began the new managed long-term care program for the state of New Mexico in August and now serve 7,000 members there in Region I. As we discussed in detail at Investor Day, these members are a mix of long-term care, SNIP, and Medicare Advantage members. The implementation of this program has gone well in part due to the careful planning and coordination among state agencies, advocates, providers, as well as the managed care plans.

At this time, we expect the roll out of Regions II, III, and IV will continue into the second quarter of 2009. Our membership expectations in New Mexico are modest by conventional standards, roughly half of the 38,000 total members. But 2009 revenue is projected to be over $300 million due to the very high per member premium of this population. These per member premiums are much larger than our average PMPM, reflecting the broader scope of services and utilization characteristics of this population. We believe this will result in acceptable levels of profitability over time but we do anticipate this product will run at a higher HPR percentage than our core (inaudible 00:13:26) business.

While it's too early to have clear visibility on medical costs, our team in New Mexico has been conducting extensive outreach to identify the healthcare needs of our members. To date, approximately 1,500 home visits and service needs assessments have been completed. This level of outreach is essential to the process of identifying members who will benefit most from the delivery of home- and community-based services which are the key to enabling independent living and avoiding the much higher cost of institutional care.

At this point, I'd like to turn the call over to John Littel who will discuss the current economic environment and its effect on state budgets. John?

John E. Littel

Thanks, Dick. It certainly has been a busy quarter on the government side of things. I know a lot of attention has been focused on the financial bailout but there is still much activity related to Medicaid. In addition to the impact of the election, the three areas that are most important to us relate to state budgets.

First, we're getting better clarity about emerging revenue projections and spending among our state and can set realistic expectations for 2009 based on that. Based on known premium levels, we already have visibility into pricing for approximately 65% of member months in our 2009 budget and believe we have reasonable insight into the parameters of the rates and the balance of our markets.

Revenue expectations for states continue to be uneven, meaning that states with energy or agricultural commodities tend to have surpluses while the remaining states have shortfalls. For us, this means that Texas, by far our largest state in membership and revenue, anticipates an approximate $11 billion surplus and New Mexico is slightly positive or neutral. As a reminder, 46% of total projected state shortfalls for 2009 are borne by California, where AMERIGROUP has no exposure.

The slowing economy and especially the declining housing market have hit Florida particularly hard, making it extremely challenging for the state to balance its budget in the face of declining revenue. For this rate cycle, the resulting budget cuts produced a generic 3% reduction in managed care rates effective September 1st 2008, which was less than the 5% reduction we initially expected. Adjusted for our membership, this resulted in a 2.3% rate reduction for us.

Obviously, we're disappointed with this outcome as Florida has a history of being very responsible from an actuarial soundness perspective. But this action was not unexpected and in the end, proved to be slightly better than we had originally anticipated. We have been performing quite well in Florida and are reasonably able to absorb this impact.

We are currently working with the state of Florida on two fronts, first to eliminate the direct enrollment program, which created significant marketing expenses for health plans as well as compliance risk; and secondly, on measures that could help reduce or control expenditures in the next budget cycle. We believe both of these initiatives will favorably support our margins in this challenging environment in Florida.

The second area of focus is on states that have early rate cycles and how they are approaching this process from an actuarial standpoint. We'll know Maryland soon and Ohio appears to be following processes consistent with our previous experience with them, and has incorporated all the data necessary for adequate underwriting.

We continue to believe that there is much states can do to further control costs within their Medicaid programs and are actively working with legislators and administration officials on enhancements to existing programs as well as coverage for new populations.

This is the third area of focus, expansion, meaning potential areas within state Medicaid programs that have previously not been incorporated into managed care. An example of this is last session's elimination of the PCCM or Primary Care Case Management Program in Florida for 25 additional counties. Throughout our states, there remain significant geographic and program area exclusions that could yield significant savings and improve quality by moving these populations into managed care.

Finally, I want to mention what's happening at the federal level. Just before the rescue package was signed into law, the House passed a second economic stimulus package that would've provided about $15 billion in assistant to state Medicaid programs in a total $61 billion package. This bill ultimately was not voted upon in the Senate.

In the past two weeks however, Democratic leaders in both the House and the Senate have indicated their intent to bring Congress back for a lame duck session in November to consider an expanded economic stimulus package. This new stimulus bill will likely build upon the one passed by the House a few weeks ago and include at least $15 billion for state Medicaid programs, increasing the federal match rates for five or six quarters on a tiered approach. The state's F-map increase would be 1%, 2% or 4% depending on the state's economic conditions.

For our current states where this version has passed, this would provide an estimated $6.4 billion in additional federal Medicaid funding over the next five or six quarters, including nearly $1 billion for Florida and $2.4 billion for New York.

We believe this is extremely important for the stability of the Medicaid program in 2009 and we're encouraged by the support the stimulus package is receiving from a very broad group of stakeholders including governors, unions, AARP and earlier this week, Fed chairman Ben Bernake.

Congress recognizes what we see up close. The pressures of Medicaid on the states are real and growing. Should it pass either in lame duck or next spring under a new administration, the states will be better equipped to finance actuarially sound rates.

At this point, no one can predict with certainty what Congress will do but we do believe that this has a very good change of passing as many members seem motivated to act now to address this important segment of the economy.

So with that, I'll turn the call over to Jim Truess. Jim?

James W. Truess

Thanks, John. Good morning, everyone. As I do each quarter, I'm going to provide an overview of our financial results for the quarter and then discuss our update to full year 2008 guidance, as well as our initial guidance for 2009.

Net income was $39.4 million in the third quarter, resulting in earnings per diluted share of $0.74 versus $31.2 million or $0.58 in the third quarter of 2007, and compared to $36.7 million or $0.68 per diluted share in the second quarter of 2008, excluding the one-time litigation charge. Third quarter total revenues were $1.1 billion, reflecting an approximate 9% increase in premium revenue, compared to the third quarter of 2007.

As expected, premium revenue decreased when compared with the second quarter of 2008. The one time premium payment of $47.3 million in Tennessee was a primary driver that elevated revenue in the second quarter. Excluding this payment, third quarter premium revenue increased sequentially by 3.9%. This increase was due to membership growth, rate increases and member mix changes.

Third quarter investment income and other revenue was $17.6 million compared with $19.1 million in the third quarter of 2007. Sequentially, investment income and other revenue decreased almost $1 million primarily due to a decline in invested assets following the payment of the litigation settlement in August.

Let me divert here for a minute and talk about our investment portfolio. Not surprisingly, with the significant credit market dislocations, we are monitoring our investment portfolio closely. Fortunately, we have fared quite well. We have remained invested in short-term, high-quality instruments. We do not hold any securities that have fallen into default nor have we needed to take any write downs during the quarter for impairments.

As of September 30th, we have $1.35 billion of invested assets, allocated as follows. Approximately 52% of our portfolio is invested in high-grade money market instruments. Approximately 38% is invested in debt obligations of government-sponsored entities. Approximately 4% is invested in investment-grade corporate bonds. While one of our securities received a credit rating downgrade, it remains within the investment grade range. And approximately 6% is invested in municipal student loan corporation auction rate securities.

While liquidity remains constrained on these securities, we continue to see issuers calling their bonds and yields are resetting at attractive levels right now. All remain towards the top of the investment grade range. We will continue to monitor the portfolio closely and make adjustments as appropriate.

Health benefits as a percent of premium revenue were 80.1% for the third quarter of 2008 versus 82.9% in the third quarter of 2007 and compared to 82% for the second quarter of 2008. The health benefits ratio declined sequentially due to strong performance during the quarter in a broad range of our market. In the majority of cases, our health plans exceeded HBR expectations with solid performance on the premium line and effective management of medical costs.

With an additional quarter of paid claims information, we can see that our medical trends have moderated in our more mature markets as well as our newer markets. Dick highlighted the improvements we are seeing in Tennessee. This moderation in trend is enhancing our performance in the current period and yielding lower medical costs in prior periods. Favorable reserve development contributed to the lower health benefits ratio this quarter with changes primarily impacting the estimates of medical costs incurred in the first half of 2008.

Again, this was across a broad set of market. Georgia, Tennessee, and Texas recorded the most significant favorable development. We even saw modest favorable development in our newest market South Carolina.

Selling, General and Administrative expenses were $161.5 million or 14.4% of revenue for the third quarter of 2008 compared with $148.1 million or 13.1% in the second quarter of 2008. Underlying SG&A expenses we’re actually favorable to expectations this quarter, although total SG&A expenses were elevated due to increased accruals for experience rebate expense and variable compensation expense.

Our variable compensation plans reflects with the performance of the company and the substantially raised performance expectations for the year drive higher accruals. Excluding the added period component of both the experience rebate and the variable compensation, the SG&A ratio would have been 12.5% in the quarter.

The third quarter tax rate was 38.9% compared to the second quarter tax rate of 37.1%, which excludes the litigation settlement charge. The distribution of profitability has changed slightly between states year-to-date, and therefore the blended tax rate has been adjusted accordingly.

In the third quarter excluding the litigation settlement payment, we generated cash flow from operations of $74 million or 1.9 times net income. Year-to-date excluding the one-time litigation settlement, we generated $169.8 million or 1.5 times adjusted net income. We believe this solid cash generation demonstrates the fundamental strength of our business.

Cash in investments at quarter end totaled 1.35 billion, of which 283 million was unregulated. Unregulated and unrestricted cash increased approximately $103 million during the quarter. We repurchased approximately $4 million of common stock in the quarter pursuant to our stock purchase plan and repaid $52 million of debt, reducing our debt to capital ratio to 27.6%. We now have $50 million outstanding on our term loan.

Our days in claims payable was 55 days, up one day from 54 last quarter and remains at the higher end of our expected range of 45 to 55 days.

Turning now to our 2008 estimates. The company expects 2008 annual earnings in the range of $2.58 to $2.63 per diluted share, excluding the litigation settlement. Our 2008 estimates are predicated on the assumption that all products and markets operate at expected levels.

Additionally, these estimates include the following full-year assumptions among others: organic premium revenue growth in the 13.5 to 14% range; investment income and other revenues slightly below the prior year; health benefits of approximately 82% of premium revenues; Selling, General and Administrative expenses in the low 13% range as a percent of total revenues; and shares outstanding of below 54 million, which includes common share equivalent that have a diluted potential when the company reports net income.

Let me provide a little additional color on our updated 2008 estimates. As I mentioned in my comments regarding the results for the quarter, we benefited from some favorable reserve development in the third quarter and we also had higher SG&A expenses that are not reflective of run rate activity in the quarter.

In establishing our guidance, we placed run rate performance at approximately $0.67 in the third quarter. From our updated guidance range, you can see that we are estimating $0.52 to $0.57 in the fourth quarter. The sequential change from the third to the fourth quarter is largely due to expected seasonality.

We are introducing our 2009 full year outlook. Company expects earnings per diluted share in the range of $2.50 to $2.65. Total revenues are expected to be in the range of $4.8 to $4.9 billion. We expect our earnings growth from health plan operations to be strong in 2009, although I recognize that if you compare our 2009 guidance to our 2008 guidance that is not readily apparent.

There are a few non-operational changes between the years, which makes the comparison more difficult. First, 2009 guidance includes the impact of the change in accounting treatment for convertible debt. The impact of this change is expected to reduce earnings by $0.12 per diluted share.

Second, our effective yield on investments is expected to be about 3.25% in 2008. That’s the blended average of lower yields on instruments purchased during the year and generally higher yields on instruments originally purchased in prior years. Also, we’ve earned investment income on the funds paid out for the litigation settlement during much of 2008. For 2009, we are assuming that effective yields in our investments will be well below 3% due to the current market.

On the operating side, there has been a range of unique items in 2008; some positive, some negative. This include the significant premium payments in Georgia and Tennessee related to 2007. We also carried some one-time expense items such as the DC and West Tennessee market access. The elevated cost for private duty nursing in middle Tennessee during the first half were another unique item in 2008.

All of these factors and many others play in to our 2009 estimates. Maybe most important we believe our underlying operational performance will remain strong. We are achieving the improvements we expected too in our newer markets and our more mature markets remain solid.

And as I discussed at our Investor Day, we expect our SG&A ratio to decline sequentially. We are gaining material efficiencies in our SG&A from ongoing operational improvements, process enhancements, and strict management of cost.

While general economic concerns are bound these days, and we are certainly not immune to all of them, we remain enthusiastic about 2009 and have every expectation of a successful year. Our 2009 guidance does not include any potential accretive impact from entry into Nevada as final contract approval is still pending at this point.

I want to mention one other point about 2009. If you attended our Investor Day, you may remember that I discussed a couple of reporting changes that we’re going to implement in 2009. I discussed the convertible accounting change. I also mentioned our plan to more clearly display premium tax expense so you could easily see that number.

There’s a third change which we have recently elected to make. We often incur experience rebate expense in Texas depending upon our performance in that market. Today, we record that charge in SG&A. Beginning in 2009, we’re going to include that amount as a reduction on the premium revenue line.

We believe this will be an improved presentation. In most cases, swings in the experience rebate amount are usually associated with changes in medical expenses. The experience rebate functions like a premium rebate. This change will provide better visibility on the HBR ratio and more stability in the SG&A ratio.

As we saw this quarter, and has been the case in previous quarters, swings in the experience rebate expense caused the SG&A ratio to move up and down. This change reduced our revenue estimates in 2009 by about 1%; however, it has no impact on the bottom line.

So with that, let me hand the call back to Jim.

James G. Carlson

Well, thanks, Jim. Look, you all know better than most how turbulent a time this is in the financial markets. Notwithstanding this turbulence, I am pleased with the discipline, focus, and results our team has demonstrated in health plan operations, our Virginia Beach-based shared services, developing growth opportunities, government relations, and managing our balance sheet.

With the pressure on state budgets and the emphasis on health care reform in this election cycle, I believe that the discipline and expertise we offer will be even more important and sought out by government partners. While there may be some headline risks over the next couple months, the simple fact is that dependence on government-sponsored health care is likely to grow, not shrink, and that the most efficient means for the government to provide this care is through the kind of care coordination we offer.

So with that, let’s open the call for Q&A. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Your first question comes from Tom Carroll of Stifel Nicolaus.

Thomas Carroll Stifel Nicolaus & Company, Inc.

Good morning.

James G. Carlson

Good morning, Tom.

Thomas Carroll Stifel Nicolaus & Company, Inc.

I guess a couple just quick market-specific questions and then I’ll jump back in the queue if I have more. But could you size for us the potential of the Tennessee long-term care initiative as it looks right now in your opinion?

And then secondly in Florida, what is Amerigroup’s exposure to those 25 states that are eliminating the PCCM model?

James G. Carlson

Twenty-five counties. Yes. Dick, you want to–

Thomas Carroll Stifel Nicolaus & Company, Inc.

Or counties, yes.

Richard C. Zoretic

Yes, by all means. In the middle Tennessee region, which is where we operate of course, there are roughly 12,000 expected beneficiaries that would be moved in to the program, and our expectation is that we would receive roughly half of them. And at the moment, the presumed effective date is next July, but of course that could move around as we’ve seen in other markets.

In terms of revenue, it’s a little early to pinpoint it, but our expectation is that the revenue here would be quite sizeable on a PMPM basis certainly on new order of New Mexico, if not higher. And in terms of annual premium, again the number is not solidified yet because the underwriting hasn’t been completed but you’re probably looking at something in the couple of hundred million dollar range.

John E. Littel

Tom, on the 25 counties, the way they are doing it is if they can arrange for two managed care companies in each county, then they will eliminate the MediTask program there. So, the most important ones are the ones in South Florida where we are in all of those markets, the Palm Beach, the Dade, the Brower, those are all the important, sort of from a volume standpoint, so start getting more north I think it gets a little bit, we are less involved in those, so I think we can give you an exact number but I think it’s about, we are in about two thirds of those markets right now.

Thomas Carroll Stifel Nicolaus & Company, Inc.

And just back on the Tennessee question, is it your understanding this is not going to be an official RFP bid process that the state just intends to go out to vote you and United?

Richard C. Zoretic

Yes at the moment that’s the way it looks and we have no reason to think that is going to change.

Thomas Carroll Stifel Nicolaus & Company, Inc.

Great. Thank you.

Operator

Your next question comes from Greg Nersessian with Credit Suisse

Greg Nersessian – Credit Suisse

Hey thanks, good morning. Just a first question on the fourth quarter guidance color, Jim, that you’ve provided, the level of seasonality, I guess, seems maybe a little bit more pronounced, could you just talk to that, is that because of a change in business mix that you expect that or something else? And then also maybe if you could just sort of quantify the impact that the change in Tennessee benefit level that you’re providing, you know, that CMS authorized at the end of September, what that impact would have in the fourth quarter as well?

James W. Truess

Sure, hey Greg. With regard to the 4th quarter I think there’s probably two things going on there, maybe if you think about it from the HBR ratio. We always expect the HBR to come up a bit in the fourth quarter due to seasonality. The other thing that is pushing that up a bit more, too, is the New Mexico business in our portfolio is a bigger chuck. You’ve got a lot more members and a full quarter of that higher volume of members and so that has an impact on the ratio as well. Outside of that, I don’t think we are thinking anything fundamentally different on seasonality in the 4th quarter than we would have in prior years.

And then your second question was Tennessee benefit change, is that right? I don’t think we are going to get read deep into the specifics on the exact value of that change, but I think as Dick mentioned in his comments, we started off working on the least costly alternative, made some good progress on that, had an effect on that, the benefit change then kicked in, in September, and we will really see the deeper and more significant impact of that benefit change in the 4th quarter, so I guess you could call it a nice tail wind we have in Tennessee as we move into the 4th quarter.

Greg Nersessian – Credit Suisse

Okay great and then on the Ohio rates that you mentioned, it sounded like the process was tracking in line with previous negotiations, not exactly sure what that meant, I mean how are you feeling about Ohio going in to next year? Do you expect the rate environment to improve there? What are your initial thoughts?

James W. Truess

Well, I’ll make a few directional comments, Greg, in that I think we are feeling a little bit better about Ohio. In fact, that’s the first quarter we have been able to say that in awhile. We just harvested a rate increase that was much needed for July 1, so you start seeing a little impact of that in the quarter. We have done some recontracting there with a major system that was part of our significant cost driver, so we think that’s going to help us a little bit going forward and then we do have a preliminary rate starting point for the negotiation so to speak from Ohio that we do think is directionally appropriate and it remains to be seen whether it fully meets the test of actuarially sound, given the experience there, but for the first time I think we have got a little bit better outlook for Ohio and if we can get this rate increase to the appropriate level, I think we will feel a little bit better about our presence there.

Greg Nersessian – Credit Suisse

Okay, great, and then if I could just squeeze one more in, this may be a little bit bigger picture. Strategically AMERIGROUP obviously used to be a fairly acquisitive company. That has not been the case the last couple of years, but I’m just sort of curious, you know, 2009 no major RFPs out there and wondering if perhaps this credit, these credit issues may have resulted in some smaller plans that you’ve had an eye on or that you’re watching, maybe feeling the brunt of that credit crunch and maybe requiring addition capital, is there a possibility for you to perhaps be a little bit more opportunistic on the M&A front in 2009? Is that in your thought process?

James W. Truess

Well sure. I think that it has been a big part of the company’s past and we look at this both strategically and opportunistically. In fairness, the last couple of years I think with the overhang of the matter in Illinois, in a deal that involved our securities would have probably been pretty difficult, but the credit markets were wide open. Now the credit markets are a little bit problematic and so that would impact our environment but I do think that we have got a very strong balance sheet. We have got some flexibility in terms of things we would like to do.

In the short term, I guess the members out there that we think are the best value are members of AMERIGROUP so the likelihood that we are going to be chasing higher evaluations in other companies is pretty low, given the valuation that people have put on us at the moment, but that will change. I mean things will regress over time back to where they belong. I do think that in the private equity world, things are sort of upside down. You still have people who think they deserve even the evaluations that are better than publically traded companies right now, so you don’t see much movement there, and the publically traded world you’ve got companies that remember what they used to be worth in January and aren’t all that motivated at today’s prices to take a 5% premium or something like that, so it will change. I do think we have got the flexibility now in our balance sheet.

I think we have a strategy that supports particularly an interest in people who have populations of dually eligible people is very consistent with the themes we talked about in terms of long term care services and coordination between and coordination between the two programs. I do think there are other Medicaid properties out there that could either be Bolton additions to the business that we have or get us in to new markets that are attractive to us, and so we have got a full list of things that we look at and hopefully down the road we will find some things that are a good value for our shareholders.

Greg Nersessian – Credit Suisse

Okay thank you, that is helpful.

Operator

Your next question comes from Josh Raskin of Barclays.

Joshua Raskin – Barclays Capital

Hi. Thanks. Good morning. First question, just around the 2009 revenue outlook, you know, it sounded like New Mexico is going to be a large majority of that and I guess what are you thinking, what is that sort of organic, sort of non New Mexico, let’s call that not organic now, what is the organic revenue expectations?

James G. Carlson

Well I think the way to look at ’09 given some of the accounting changes we’ve talked about and some of the implications of numbers that are within our base, like participation in D.C. and so forth is really it’s shaping up as a year that looks a lot like the one we are in right now. I think it’s consistent with our mid to lower teens, organic revenue growth, year over year. We do have some ways that it could be a little bit better than that. For instance, we bring Nevada to closure. We potentially benefit from an SCHIP expansion. Dick talked a few minutes ago about the potential for long term care in Tennessee, but if we find out anything about this business over time, that things can change pretty quickly.

We think that if anything we are probably more optimistic that the environment that we are in right now will stimulate the states to have more active discussions about program expansions, bringing populations into managed care that haven’t been whether geographically or specific programs that haven’t been in managed care, and we feel pretty good about at least the long term growth horizon so I think we have a pretty solid plan for 2009 right in front of us.

Joshua Raskin – Barclays Capital

I guess Jim, if you think about sort of that low to mid teen growth off of the ’08 number and then add kind of like 300 million I guess on New Mexico. I don’t know if you are excluding that. I get a number well north of that 48 to 49 range, so I understand the 1% change from the Texas issue but what else am I missing?

James W. Truess

Josh, we are talking about the low teens, that’s really kind of all in, so including New Mexico. We tend to think that, this obviously changes year to year but kind of year in, year out, this is a business that generally has rate increases in the range of 3 to 5% so if you think from a static membership base, your revenue is going to go up by 3 to 5%, depending upon the year and the mix, hopefully grow some membership in the states you’re in either from just core organic growth or discreet program expansions and you add on a new piece like in New Mexico or whatever the new opportunity may be. That’s how you kind of work up to that sort of low teens number.

James G. Carlson

I think another comment I would make is that we really see 2008 to 2009 as sort of a return to what has characterized the industry for many years is growth from a lot of different places. We sort of spoiled the investment community I guess in particular the last couple of years with these big mass of IRPs that drove lots of revenue, very attractive, even much larger companies than ours, very competitively pursued, but the reality of this business is that it has been incrementally growing for a long time now and I think that’s an environment that we’ve proven that we can thrive in.

We do a good job of organic growth within existing markets. I mean, just note in the most recent quarter sequentially up 3,000 members in Maryland. We’ve seen the talk about this virtually three out of every four quarters in a year. This is a market that has been so called saturated or mature for years, and yet AMERIGROUP continues to grow members and revenue in a place like Maryland so that’s very typical of the way this business can behave.

Joshua Raskin – Barclays Capital

That makes sense and then just one last question, that 48 to 49 does that include Tennessee long term care in the middle region?

James G. Carlson

No, we did not. We only put things into forecast and guidance that are contractually lined up and very reliable so we don’t have that in there.

Joshua Raskin – Barclays Capital

Okay that makes sense and a last question, I guess Jim, what was the actual prior period of deserved development in the third quarter and I guess, you know, as you think about your ’08 guidance now, what exactly is the run rate number? If you sort of took all the puts and takes, I know you’ve done this in the past, it’s been very helpful, just what is your thought as to what were the poor earnings excluding the retro benefit and then the higher nursing costs, etc?

James G. Carlson

I think Jim will provide a little color on that. I guess one perspective we had as we were adding up the number in the quarter and looking back to what we said a year ago is we pretty much had the year we told people we were going to have but we didn’t make the interest income that we thought we would have. If we had, we would be having one heck of a year from a performance standpoint but that’s just the way the chips fell this year. We will provide a little more view on how to look at that, Jim.

James W. Truess

Sure, let’s start back on Q3 for a second and let me just recount just a couple of the pieces here. So as you know, we reported $0.74 and then, as I mentioned in my comments, for our purposes of our analysis, we placed the quarter on a run-raid basis at 67, and you really get there by—I’ll work from the bottom to the top here—as I mentioned down on the SG&A line, we reported 14.4%. If you back out the two items that I mentioned that are related to results in prior periods, that brings the SG&A ratio down to 12.5%.

Then up on the medical costs line, as we mentioned there, we had favorable reserve development, we reported 80.1% loss ratio, and if you would back off the development, that would bring our estimate of the run rate up to 82.6% on a loss-ratio basis. So I think if you think about that 82.6%, and as we just talked about a minute ago, as you move into the fourth quarter, we think due to normal seasonality and that kind of stuff, the HBR will come up in a normal fashion as expected. So hopefully that gives you some color on how we’re looking at the third quarter.

With regard to the 2008/2009 question, let me step back a little bit and give you a little color on how we do this. We tend to always do a very granular, bottom-up build where we work product-by-product, state-by-state and really look at what are our run-rate medical costs, how do are those things trending. We develop different assumptions in different markets depending upon what our experience is, as well as the expectations. Our ultimate build-up to the guidance we give you for 2009 is a pretty granular detail process, as I imagine you’d expect. But with regard to how you look at 2008 and how you think about cross walking that to 2009, I think that a couple of the puts and takes, if you’ll allow, that I mentioned that I think are important was Georgia and Tennessee, obviously we picked up some revenue in the first quarter in Georgia that was related to 2007. And then in Tennessee, the big payment we got in the second quarter, a chunk of that was related back to 2007 for the first three quarters we were in the program in 2007. And then as of course has been talked about, extensively we have the higher private-duty nursing, higher general costs and tendency in the first half of the year.

None of those three things do we expect are going to repeat. Then also, we have the DC and West Tennessee exit costs that we incurred. Actually, I think I mentioned last quarter, we certainly incurred all those, those probably came in a little bit lower than we originally anticipated, so that was nice to see.

The bottom line here though–this is what I would recommend, and this is how I would recommend you look at it, you can get pretty lost in the weeds on all these different puts and takes back into 2008. I think the most, probably the most important thing to think about when you look at the sequential comparison of 2008 to 2009 is to go back and say, okay, $0.12 on the non-cash charge, on the convertible bond accounting change.

The second thing is investment income. It’s all been market driven, we talked about during 2008 that our yield was going to slide down during the year, which it has done, and so we expect as we go into 2009, we’re no longer going to benefit from those higher yields that we enjoyed in the first quarter and back in the second quarter. So that’s having a significant impact. In fact, between those two, that’s worth about $0.30 sequentially. You can go back and do a range of adjustments and include or exclude things in 2008 as you might see fit, but when we build all those pieces in and look at where were last year, and where are we going to next year, our earnings growth rate is really quite consistent with the revenue growth rate that we talked about; it’s in the low teens number, and we can obviously quibble about a penny or two here or there or a percentage point here or there, but I almost think the easiest way to look at this is just to recognize accounting change on the convert and interest income. Those are probably the most significant.

Joshua Raskin – Barclays Capital

Okay, that’s more then helpful, thank you.

Operator

The next question comes from Scott Fidel of Deutsche Bank.

Scott Fidel – Deutsche Bank

Thanks, good morning. Our first question–just appreciated the details on the investment portfolio. If you can also walk us through where your total capital position is and where that’s tracking right now relative to minimum statutory requirements. And then also, just generally in the Medicaid markets, what are the average RBC levels that you are required to carry? Is it 250% to 300%?

James G. Carlson

Sure Scott, great question; let me offer a couple perspectives on that. We tend to look at our capital position in our subs from maybe two angles. The first is where do we stack up relative to the specific requirements in the states, and those can be different. Some states are real simple RBC states under the national standards, and then some have their own specific standards in the state. Then, we also tend to look at across the board and say, hypothetically, if everybody used RBC where would we stack up?

What you find is, we’re very well capitalized. If you were to do the comparison between what our statutory net worth is going to be at the end of the third quarter versus the specific requirements in each state, what you’d find is we’re about above two times the requirement.

So we’re very well-positioned. On an RBC basis we’re in the 300 to 400 % range if you assumed everybody was on RBC. And that also is further enhanced by the fact that we hold a lot of resource at the parent level. So we’re very well capitalized, and obviously feel good that our investment portfolio held up.

The next question, please?

Scott Fidel – Deutsche Bank

And then a follow-up on New York. Just if you can update us on what you expect, or where rates are tracking for ’09 for the negotiations. That would be obviously before any stimulus package would likely benefit New York additionally?

John E. Littel

Yes, Scott, this is John. We’re still right in the middle of negotiations with the state, there. You know they have a special session coming up. So I think they’re looking at some midyear adjustments potentially and then their rate cycle begins in April. So we’ll probably have more color for that in the next couple of weeks.

Scott Fidel – Deutsche Bank

Thank you.

James W. Truess

We have to get through a number of more callers, here, if we could move along, please.

Operator

Okay. Your next question comes from Doug Simpson of Merrill Lynch.

Doug Simpson – Merrill Lynch

Okay, good morning everyone. Jim, I was wondering, could you just give a sense in your discussions with, at both the state and the federal level, how are legislators thinking about Medicaid in terms of priority and just given what we’ve seen in the broader economy, how— has it moved up or down their priority list?

James G. Carlson

I’m going to defer to John on that one.

John E. Littel

Well, at the state level, I think it’s been at the top of their priority list. I think they’re not really capable thinking of anything else when you’re at 22 or 23 % of the state budget. So keeping those programs viable–I think we’ve evolved a lot over the past several years. They used to be turn on and off the spigot in terms of enrollment, change benefits. I think states are a little bit different now. But it’s a pretty high priority.

And as Jim said, it creates really an unprecedented opportunity for us to talk about changes, enhancements and expansion opportunities. At the federal level, I think there too there has been an enhancement of their understanding of Medicaid. Of late it really has related to how does Medicaid relate to the state budgets as a total, and how does that affect the drag or the engine of recovery at the state level. So I think they’ve gotten pretty intent on it relative to a stimulus package.

Doug Simpson – Merrill Lynch

And how do you think they’re thinking about just rising unemployment, the impact on rolls and how is that factoring into their thinking? Are they worried about the fiscal side, are they thinking about a more— just an obligation they have to bear? Give me color on that?

John E. Littel

Yes, I think they see it as an obligation. I think that’s part of what the stimulus package is in tended to see. Remember that drags out several quarters beyond an economist-defined recession. So they’re not looking at, boy we have to get out of this; they’re looking at it more as, this is what the safety net’s for.

James G. Carlson

Great. Thanks, John.

Doug Simpson – Merrill Lynch

Alright. Thanks.

John E. Littel

Thanks, Doug.

Operator

The next question comes from Carl McDonald of Oppenheimer.

Carl McDonald – Oppenheimer

Thank you. Just had a capital question, as it relates to the $280 million cash at the parent. I know you’ve talked in the past about bringing up the RBC levels in some of the subs, that could potentially be something in the vicinity of 100 million, and that would still leave you with $180 million. Have you given any additional thought to paying off the balance of that $50 million term loan to get you some more flexibility around share repurchase?

James W. Truess

Hey Carl, good morning. Yes, we certainly have. And absolutely that’s something we’re considering. The other thing I would mention, I just want to clarify something. We have talked about – we look at the RBC levels that we have in our plans, we’re not necessarily going to push more money down to the plans. We feel like they’re well capitalized. We do factor that into our analysis and thinking about what we want to hold at the parent.

But that said, yes, we’re absolutely considering all the options, and you know, the way we look at the situation right now, stepping back a little bit further and say, our business is working well, we have very good prospects. Our cash flow is great. That gives us a lot of flexibility. And we’re certainly thinking about what are ways and what are opportunities that exist during this time of turmoil that we can take advantage of, and so that’s very much on our radar.

Carl McDonald – Oppenheimer

Is there any sense of timing around that? Just in the sense of, like at least at the moment interest rates are very low, so you’re not getting much on the cash, and stock prices are very low, so you could take advantage of share purchases. Something could happen in the short term or is it more of a, deeper into ’09 event?

James W. Truess

Yes, I think we certainly concur with your conclusions there. I think at this point in time we’re probably not going to be any more specific than saying we’re giving it careful consideration.

Carl McDonald – Oppenheimer

Okay. Thank you.

James G. Carlson

Yes, one punctuation point I might add on that is when you think of the last couple of years, all these large new market expansions have grabbed their share of the cash flow that we’re generating. If anything, a less torrid growth rate is freeing up more cash at the parent level, which I think gives us more balance sheet flexibility.

Operator

Your next question comes from Peter Costa of Ftn Midwest Securities.

Peter Costa – Ftn Midwest Securities Corp.

Two questions. Can you tell where the prior period development was, the 28 million or so? In what states that was located in? And also, in terms of the New Mexico start-up costs? Last quarter you talked about it being 8 cents dilutive. How much of that was this quarter, how much of that was next quarter? And is 8 cents still the right number?

James G. Carlson

Jim, what color can you give to that?

James W. Truess

Sure, hi Pete. I think as I mentioned in my comments, Georgia, Tennessee, Texas were the larger components of the favorable development. We certainly had favorable development though in the majority of our markets. In most of them. I don’t think probably we’ll break down specifically on the dollar value by state but I’d want you to know it’s a very broad based.

I think with regards to New Mexico, yes, we’re right on track with our expectations of the impact in ’08. I don’t think our view on that has changed at all from where we were last quarter. I probably don’t have handy the exact split on the incremental EPS dilution between the quarters, but it’s relatively evenly split, plus or minus a penny or two between the two.

Peter Costa – Ftn Midwest Securities Corp.

Okay. Thank you.

Operator

Your next question comes from Brian Wright of Bank of America Securities.

Brian Wright – Banc of America Securities

Thanks. Good morning. Can you talk a little bit about the MLR outlook for next year? Are we thinking flattish overall? Up? Down? Just general indications?

James W. Truess

Hey Brian, good morning.

Brian Wright – Banc of America Securities

Good morning

James W. Truess

You know, I don’t think at this point in time we’re going to get too deep into any of the sub statistics for next year. Certainly when we give our more detailed guidance next quarter, we’ll get into that in more detail. I think what I would offer, though, is as we sit here at the end of this quarter and have the opportunity to look back on where our performance has been over the last three or four quarters, we’re certainly pleased and gratified where our HBR is running, and I think as Dick and I sit down and comb through all of the various markets and work on the budget, as we mentioned, I think we feel our mature markets are solid and our new markets are doing what they are supposed to do. So I think we are upbeat with regard to how things are going. But that’s probably about as much as I think we’ll be able to give at this point.

Brian Wright – Banc of America Securities

Okay. And then just if I think about some of the moving parts for next year, would Tennessee move towards company average, whatever that is? Or be a little higher, a little lower?

James G. Carlson

Well, I think we’re just going to say at this point we’re just a year and a half into it. We always like to make sure we’ve got at least two years of operating experience before we pronounce any victories or that we’ve gotten all the way to company average. I think it’s made tremendous progress of late and will continue to make progress. A lot will depend upon how the experience goes between now and the next trend rate cycle. And we’ll have a better sense of how close we are to those company averages when we get through that.

Brian Wright – Banc of America Securities

Okay. And then just one last question. Was there any meaningful impact from the Ohio risk adjustment payment process that went into effect for the quarter?

James W. Truess

No, I don’t think so.

Brian Wright – Banc of America Securities

So, basically no impact, then?

James W. Truess

Right. Not really. Correct.

Brian Wright – Banc of America Securities

Okay. And then I guess did the favorable development in the quarter was about 32 cents, but that was really mostly inter-year? Could you break that out between what was current year versus prior year?

James W. Truess

You know, I don’t think we’re going to get into breaking it down more precisely, by quarter. As I mentioned, certainly the majority of it was in the first and the second quarter. And let me tell you why.

One of the things that I think we’re trying, that I’m certainly trying to avoid is, I think we can get into this where different people are making a whole bunch of adjustments on different quarters, and we’re losing in some cases what’s happening with the company. If you look back now and say where we’ve been for the three quarters, we put up 65 cents in the first quarter, we put up 68 cents in the second quarter, and we put up 74 cents in the third quarter.

Yes, we can quibble about cents here in different quarters and all that, but I think we’re on a pretty nice trajectory, and I guess I’m reluctant to get too deep into let’s go back and re-change the past because we never go back and do a full refresh on every prior quarter. So, I think that’s as much as we’ll give at this point, and go from there.

Brian Wright – Banc of America Securities

Okay. It makes sense; there are just so many moving parts in this business.

James W. Truess

Yes. No, I understand. I understand.

Brian Wright – Banc of America Securities

Okay. Thank you.

James G. Carlson

Time for a couple quick more questions.

Operator

Your next question comes from Matt Perry of Wachovia.

Matt Perry – Wachovia Capital Markets, Llc.

Hi. Good morning. Jim Carlson, maybe you could talk a little bit about the recession? If we think of the potential for the economy to be weak for the next several quarters, possibly, and we think about a stimulus bill, and maybe more people qualifying for Medicaid, but offset maybe by pressure on rates, how should we think of that potential recession in regards to your ’09 guidance? Is there more potential for upside or downside relative to where you’re setting guidance now?

James G. Carlson

Well, I don’t know about the last part of your question, but I think we have a lot of perspective on the impact of the economy on our business. Right now, we’re not seeing any evidence yet of surging membership or program cutbacks or any of those sorts of things. But those are possibilities.

I said earlier that I think we have, if anything we’re seeing more strongly the opportunity to get additional populations into managed care. I think John’s comments about the state budget concerns put it into perspective quite nicely. Yes, there is headline risk. But half the headlines are in California.

A third of AGP is in Texas. Texas has a surplus. We think we have really strong visibility into the 2009; noticed a lot of companies haven’t been able to come out with a 2009 guidance at this point in time. Mindful of my former experience in big, multi-lined companies, I can understand that it’s pretty challenging the different products and market segments and pricing strategies that characterize those businesses. At a time like this, I think it’s aided by the fact that we have 11 clients, we work with them directly on rate so we have a little bit better sense I think as to the predictability.

I think we’ve demonstrated a lot of discipline in our business in the past year. We’ve been willing to exit a market when it just won’t stand up to a test of actuarial soundness, we’ve got a lot of experience managing in managing in similar situations. And we got FMAP passed either in the stimulus bill in the Lame Duck or a new administration, I don’t think it would really change outlook per se, I just think it would give everybody a whole lot more confidence and the states would be able to engage in the cartulary sound rating processes that we’ve benefited from.

I mean, all business at a time like this are worried about their top lines, we’re certainly exempted from that. People are not buying stuff, they’re not traveling, business aren’t going inventories, we see belt tightening everywhere, but we do think that a business like our where the value of the services that we provide to the most vulnerable citizens, financially vulnerable people, people with disabilities, these are things that government is supposed provide for in tough times and when we do the best job of delivering these services better then anybody out there and we think that underscores the value of this business and we’ll get through these challenges just fine. We’re the safety net and this is a time when the safety net is more important then ever.

Matt Perry – Wachovia Capital Markets, Llc.

And if I could squeeze in a related question there, I think you talked earlier in the call about having good visibility on rate increase for 65% of your member months and that leaves 35% where you probably have a little less visibility or are working on now. Have you built in maybe a little bit lower rate increase on that 35% as those negotiations will kind of be ongoing while the economy is pretty weak?

James G. Carlson

Well, I think the best way to look at this is we’re mindful of all the things I just said and in building our forecast we certainly looked deep into what’s going on in the individual state. Now, clearly they’ll be more information that emerges during the course of the year, but remember that some of that 35% would be the member months for September through December in Texas, the place that has the $11 billion surplus. So, we’re not really forecasting Texas to do anything other then what Texas always does, which is highly professional thorough, data driven analysis of the environment with a fair economic situation for successful vendors who are helping them manage these costs. So, we’re not going to say that there’s a bias up or down relative to that. We take all of this very seriously, it’s a full time job here and we’re very mindful of what the challenges are we think we forecasted appropriately based upon what we see and what we’ve experienced in the past.

Matt Perry – Wachovia Capital Markets, Llc.

Thank you.

James G. Carlson

Thank you.

Operator

Your next question comes from John Rex of J.P. Morgan.

John Rex – J.P. Morgan

Thanks just wanted to come back again to establishing exactly what you consider your cleaned up 08 earnings run rate to be? Where are you stepping off, so forget about the quarters for a minute and say, what do you view as the right cleaned-up run rate?

James W. Truess

John, I don’t think I’m going to give a specific EPF number run rate of 08, I’m reluctant to get so many different numbers floating around there for a given year. I think though that the way we look at it is, obviously there’s some ranges of points and takes there in 08. I think the most important thing is that we feel from a earning growth perspective, if you look at the guidance we have out there for 09, that puts us in the low double digits sort of earnings growth range when you take into account the convertible bond accounting change and the fact that investment income’s declining. So, we’re saying from core operations, collecting premiums, providing medical benefits, from the core of our business we think we’re in the low teens.

John Rex – J.P. Morgan

Well, so let me just come back to statements that you’ve said in the past. If I go through kind of where you’ve established clean quarters throughout the year, so we put 53 in 1Q, 60 in 2Q, let’s give you the full 74 in 3Q because that relates to 08, then roughly 55 or so in 4Q. So that sounds like $2.40 as your cleaned up run rate if we take your commentary throughout the year. If I use that as my stepping of point, and then you take the 0.30 that you were talking about for investment income and convert it looks like a 15 to 22% earning growth rate. And that’s where my confusion is here. I’m kind of cross walking to what you’re saying and the implication from the same statements you’ve in the past. So, I think it would be really helpful if you kind of get view of a full year cleaned up 08 run rate. We need a jumping off point.

James W. Truess

Sure, that’s fair, I appreciate that. Yes, I think probably the only deviation I would have from what you described is that now with the benefit of hindsight we’d probably place those first and second quarters at a little higher then the numbers you quoted.

John Rex – J.P. Morgan

Okay, where would you place them?

James W. Truess

[Laughs] I probably am not going to be able [interposing].

John Rex – J.P. Morgan

I think it’s a fair question for a company to have a view on a cleaned up earning run rate. I don’t think we should end the call here without you having established a view. Who has a better view then the company?

James W. Truess

Yes. No, I understand. I appreciate you’re perspective on that. I think I will stand on the comments. I think our primary way to look at it would let’s say there’s about 0.30 crossing over for those two items I mentioned.

John Rex – J.P. Morgan

So explain to me your hesitancy in providing a management’s view on a run rate.

James W. Truess

Yes, I’m happy to do that, but, if you want we’ll take a minute to get into that. When we look at it we’re obviously factoring many, many, many different factors. Some of them are very small some of them are more specific or larger. And we talked about those larger items here.

What I just don’t think we can do justice to in a format like this, and I don’t think we’re going into getting down to the sort granular level of , you know, in a certain we talked about Ohio for example, so we had medical costs there a little higher. We made some operations changes we think those change and give us a different run rate in a market like. In order to really do the justice, you’d really have to go down point by point like that.

My view on that issue is that’s just not what makes sense to do in a format like. We’ve got a GAAP number out there, we’ve got a non-GAAP number out there, I don’t really want to put a third number out there. So I think – what I want you to know is we factored all those things into our guidance. Our guidance is built on the very detailed granular analysis that we use to build that up, so I hope you would appreciate that we factored those things in.

John Rex – J.P. Morgan

So maybe kind of better – you would consider kind of what I took away as kind of an implied system to 22% as too high.

James W. Truess

Yes, yes I would. That’s why I say I would think of it more in the lower teens.

John Rex – J.P. Morgan

Okay. Thank you.

James W. Truess

Yes.

James G. Carlson

Okay. Well, look, I think we’ve run a little over here today so, I’m just going to thank everybody for their attention and I hope you see that we’re pretty enthusiastic about what we’ve accomplished so far and the outlook for future. Strengthening our results in Tennessee really allows us to move that market over time and in the more typical performance just like we’ve done in Georgia, just like we’ve done elsewhere and get ourselves ready to participate in long-term care program there.

We continue to be enthusiastic about the opportunity in New Mexico, we think it enable us to assist the state designing what is truly a comprehensive and innovative program that we think will be of interest to other states. And out strong Balance Sheet and adequate capital equips to nimbly meet the changes likely in the coming year. So thank you all for joining this morning and good day.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: AMERIGROUP Corporation, Q3 2008 Earnings Call Transcript
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